Starting from the initial depreciation of baht in July 1997, most Asian countries, such as Thailand, Malaysia, Indonesia, the Philippines, Taiwan, Singapore, and Korea have experienced rapid depreciation of their currencies：this has been called “Asian Currency Crisis”. There have been many arguments and discussions in the efforts to find the causes of this crisis. Some arguments emphasized that the crisis was triggered by speculative capital movement, while others emphasize that it reflected the fundamentals in these countries. However, most of them are subjective views rather than being based on empirical analysis of objective economic indicators.

In our paper, we examine the causes of the currency crisis in Korea and Thailand empirically. First, we estimate the long-run equilibrium exchange rate of won-yen, baht-yen, won-dollar, and baht-dollar for the periods of 1971-1995 defined by Yoshikawa （1990）. His definition focuses on how supply? side real factors in addition to monetary factors, determine the long? run movement of the exchange rate. Comparing actual exchange rates with estimated equilibrium exchange rates, we can look for the sources of the recent huge depreciation of won and baht. If the movements of actual exchange rates and estimated equilibrium exchange rates are close, we can infer that the currency crisis comes from fundamental factors such as wage rates or productivity. If actual exchange rates diverge from equilibrium exchange rates, the currency crisis may reflect speculative capital movement.

Our main results are as follows. For the won-yen and baht-yen exchange rates, the movements of actual exchange rates and estimated equilibrium exchange rates were similar until the late 80’s at least. From 1990 onwards, the actual exchange rates, both won-yen and baht-yen, were more overvalued than their respective equilibrium exchange rates, respectively. Hence the rapid depreciation of won and baht to yen in 1997 is considered as a transitional process in which the actual exchange rates are converging to the equilibrium exchange rate. In the case of the won-yen rates, differences in increasing rates in wages between Korea and Japan rates induced the devaluation of the equilibrium exchange rates in terms of won. In the case of the baht-yen rates, not only differences in wage rates but also differences in productivity induced the devaluation of equilibrium exchange rates in terms of baht.

For the won-dollar and baht-dollar exchange rates, the movements of actual exchange rates and estimated equilibrium exchange rates were almost similar until 1995. However, from 1996, these currencies obviously “over-depreciated” compared with past equilibrium exchange rates. This implies that one important determinant of the rapid depreciation of the won and baht to the dollar has been speculative capital movement. However, difficulty in measuring progress in the service industry, which is the most important and leading industry in the United States in particular, may lead to underestimating the equilibrium exchange rate. This could be another possible reason for the large discrepancy between actual rates and equilibrium rates since 1995.